1、,Managerial Economics: Applications, Strategy, and Tactics, 9th Edition by McGuigan, Moyer, & HarrisPowerPoint Lecture Slides prepared by Li, Zhuo Wuhan University,Chapter 1,Introduction to Managerial EconomicsStructure of Decision ModelsProfits RoleAgency Problems & SolutionsNot-for-Profit Organiza
2、tionsWhy Corporations Have Succeeded Over Other Organizational Forms,Managerial Economics An Applied Course,Integrates the use of economics, math, and financial analysis to make good business decisions,Demand and Supply Analysis and how to estimated elasticities Production and Cost Analysis and how
3、to estimate relationships Monopoly, Competition, and Oligopoliesand how to make good pricing decisions,TOPICS,Economic Decisions,Constraints - limitations of time, energy, money, productive capacity, regulatory climate, etc. Information - forecasting, relationships, expectations, possible retaliatio
4、n by rivals, etc.,CONSTRAINTS,INFORMATION,GOALS & OBJECTIVES,Objectives of the Firm,Profit maximization Shareholder wealthThe value of the firm =V0 (shares outstanding), is the present value of expected future profits or cash flows, discounted at the shareholders required rate of return, ke, ignorin
5、g taxes. V0 (shares outstanding) = t /(1+ke) tt=1,Goals or Objectives,Maximize Present Value of Profits = N(Revenuet - Costst) / (1+ke)tt=1 Decision Model Language: Objective Function = sets up the goals & the constraints Decision Rule = shows what is optimal,EXAMPLE: MAX A, B ,simple objective func
6、tion, simple decision rule Pick A if profit A profit B, otherwise pick B. Max Profit Q for a competitive firm produce where P = MC,MC,P,Q,Profit = TR - TC =PQ - TC,Q-,Q+,To make good economic decisions, managers need to be able to forecast & estimate relationships Will be forecasting demand applies
7、to for-profit corporations non-profit organizations Hospital Administrators - # patients University Administrator - enrollment Regression analysis, time series methods, and qualitative forecasting methods used for forecasting,The Role of Profits,Economic Cost (or opportunity cost) is the highest val
8、ued benefit that must be sacrificed as a result of choosing an alternative. Economic profit is the difference between revenues and total economic cost (including the economic or opportunity cost of owner supplied resources such as time and capital.,Theories of Why Profit Varies Across Industries,RIS
9、K-BEARING THEORY DYNAMIC EQUILIBRIUM (or FRICTIONAL) THEORY OF PROFIT MONOPOLY THEORY OF PROFIT INNOVATION THEORY OF PROFIT MANAGERIAL EFFICIENCY THEORY OF PROFIT,Agency Problems,Modern corporations allow managers to have no, or limited, ownership participation in the profitability of the firm. Shar
10、eholders may want profits, but managers may wish to relax.The shareholders are principals, whereas the managers are agents. Conflicting motivations between these groups are called agency problems.,The Principal-Agent Problem Shareholders (principals) want profit Managers (agents) want leisure & secu
11、rity Examples KKRs takeover of RJR Nabisco to refocus on wealth-maximization The LBO by O.M. Scott from ITT improved Scotts performance,Solutions to Agency Problems,Compensation as incentive Extending to all workers stock options, bonuses, and grants of stock Help make workers act as owners of firm
12、Incentives to help the company, because that improves the value of stock options and bonuses.,What Went Right? What Went Wrong?,Saturn Corporation Different kind of car company in 1991 No-haggle pricing Sales were above expectations But, margin of only $400 per car to GM GM earned only 3% on capital
13、 Saturn customers wanted bigger Saturns rather than trade up to Buick, as GM hoped. When the dollar appreciated, Japanese firms could price their cars more competitively.,Shareholder Wealth Maximization: Conditions,COMPLETE MARKETS - liquid markets for firms inputs and by-products (including polluti
14、ng by-products). NO SIGNIFICANT ASYMMETRIC INFORMATION - buyers and sellers all know the same things. KNOWN RECONTRACTING COSTS future input costs are part of the present value of expected cash flows.,Goals in the Public Sector and the Not-For-Profit (NFP) Enterprise,Instead of profit, NFP organizat
15、ions may have as their goals: 1. Maximization of the quantity of output, subject to a breakeven constraint. 2. Maximization of the utility (happiness) of NFP administrators. 3. Maximization of cash flows. 4. Maximization of the utility of contributors to the NFP organization.,Which goal a NFP manage
16、r selects affects decisions made. A food shelter manager may decide to maximize the utility of contributors by selecting only “healthy foods“ Public sector managers are performance monitored. V.A. hospital administrators are rewarded by reducing the cost per bed over a year. Hence, they become efficient with respect to costs. The “friendliness“ of the hospital staff is harder to measure, so friendliness will tend not be a high priority of the public sector manager.,
